Good morning. I'd like to welcome, everyone, to the Arlington Asset Second Quarter 2012 Earnings Call.

[Operator Instructions] I would now like to turn the conference over to Mr. Kurt Harrington. Mr. Harrington, you may begin, sir.

Kurt Ross Harrington

Thank you very much. Good morning. This is Kurt Harrington, Chief Financial Officer of Arlington Asset.

Before we begin this morning's call, I would like to remind everyone that statements concerning future performance, market conditions, risk spreads, private-label MBS trading activity, liquidity levels and credit trends, agency-backed MBS prices, cash earnings, book value, portfolio allocation, plans and steps to position the company to realize value and any other guidance on present or future periods, constitute forward-looking statements that are subject to a number of factors, risks and uncertainties that might cause actual results to differ materially from stated expectations or current circumstances.

These factors include, but are not limited to, changes in interest rates; increased cost of borrowing; decreased interest spreads; changes in default rates; preservation of utilization or net operating loss and net capital loss carry-forwards; impacts of regulatory changes, including actions taken by the Securities and Exchange Commission; impacts of changes to Fannie Mae or Freddie Mac; actions taken by the U.S. Federal Reserve and the U.S. Treasury; availability of opportunities that meet or exceed our risk-adjusted return expectations; ability to effectively migrate private-label MBS into agency-backed MBS; ability to realize a higher return on capital migrated to agency MBS; ability and willingness to make future dividends; the failure of sovereign or municipal entities to meet their debt obligations or a downgrade in the credit rating of such obligations; ability to generate sufficient cash through retained earnings to satisfy capital needs; changes in and the effects on the company of mortgage prepayments fees; use of proceeds from our recently completed equity offering; ability to realize book value growth through reflation of private-label MBS; the realization of gains and losses on principal investments; the outcome of certain litigation and investigatory matters; available technologies; competition for business and personnel; and general economic, political, regulatory and market conditions.

These and other risks are described in the company's annual report on Form 10-K for the year ended December 31, 2011 that are available from the company and from the SEC. And you should read and understand these risks when evaluating any forward-looking statement.

I would now like to turn the call over to Eric Billings for his remarks.

Eric F. Billings

Thank you, Kurt. Good morning, and welcome to the second quarter earnings call for Arlington Asset. I am Eric Billings, Chief Executive Officer of Arlington Asset. And joining me on the call today are Rock Tonkel, President and Chief Operating Officer; and Brian Bowers, our Chief Investment Officer. Thank you for joining us today.

You can see from last night's press release that Arlington reported core operating earnings of $11.3 million, or $1.16 per share-diluted, for the second quarter. Overall, this was a positive quarter for the company. Return on equity from core operating earnings -- operating income of 20.5% was driven by several factors. The deployment of the proceeds from our first quarter capital raise took full effect from the end of April onward and added spread income without increasing our G&A expense.

Continued low prepayment speeds in the company's agency mortgage-backed securities portfolio and high unleveraged cash yields from the private-label mortgage-backed securities portfolio were an important contributor again this quarter.

Finally, the company recorded realized net cash gains from the sales of agency mortgage-backed securities during the quarter of [ph] $0.14 per share.

We are seeing very encouraging performance from both our agency and our private-label portfolios. In the agency portfolio, all of our assets were specifically selected for prepayment protection of some type. Approximately 53% of our portfolio was originated under HARP programs. And our remaining assets consist of either low-balanced loans, low-FICO loans, high-LTV loans or loans with other prepayment protective features.

These loan characteristics significantly reduced the economic incentive to the borrower to refinance or constrain the borrower's ability to refinance. And because the loans underlying our agency portfolio on average were originated in the last 12 months, borrowers were able to take advantage of already low rates and consequently may have less incentive to refinance now when compared to loans originated in the earlier years.

Over the last year, our agency portfolio demonstrated the value of asset selection, which has resulted in low portfolio CPRs in the range of 4% to 7%. That trend continued this quarter with a portfolio CPR of 4.4% versus CPRs of 26% on the Fannie Mae 4.5% universe.

For Arlington, the concentration of our portfolio in prepayment-protected mortgage-backed securities below CPRS has a significant positive impact on the consistency of our asset yield and spread income as well on the preservation of book value.

Prices for assets with these particular characteristics have risen sharply as the positive impact of the prepayment performance has become apparent. As our agency assets have appreciated, we have selectively taken the opportunity to further improve our asset profile as well as expected CPR performance and resulting spread income from the portfolio.